Some of the key documents in the mountain of paperwork that homebuyers sign at closing time when they purchase a house are about to get a big makeover.
The changes, which take effect Aug. 1, are being imposed by the U.S. Consumer Financial Protection Bureau to address problems that surfaced during the meltdown of the housing market when millions of buyers took on complicated loan products they didn’t understand and ended up losing their homes in short sales or foreclosure.
At least one of the changes is aimed at giving buyers a little breathing space — allowing them three days to review all the paperwork and ask questions about it rather than rushing through it at settlement, as many currently do.
Anyone who has bought a home in recent years is familiar with the good-faith estimate, the truth-in-lending document and the HUD-1 settlement statement. All three of those documents are set to disappear as part of the new rules established by the bureau in accordance with the Dodd-Frank Act.
“The goal of the CFPB is to make it easier for consumers to understand their loan terms,” says Mitchel Kider, chairman and managing partner at Weiner Brodsky Kider PC in Washington. “I think the result will be helpful to consumers but there will be a learning curve for everyone.”
Indeed, experts say the changes will force lenders to centralize or regionalize their closing processes. The American Bankers Association said last week it was worried its members wouldn’t have the software in place to accommodate the new rule. A survey, it said, showed that more than 20 percent of banks would opt not to offer certain mortgage products if its systems were not ready.
Until the anticipated hiccups in the system are worked out, some experts say, the conversion could actually harm some consumers by delaying their closings.
“This should be great for consumers in the long run, although in the short term there could be a delay in settlements just because it’s a change in processes,” says Jonathan Corr, president and chief executive of Ellie Mae, a software provider for more than 100,000 mortgage professionals in Pleasanton, Calif. “Making things simpler for consumers can increase the complexity on the back end.”
The rules will apply to consumers who apply for a loan after Aug. 1, Corr says.
“If you apply for a loan in July and close sometime after Aug. 1, you’ll still be using the old forms,” Corr says.
When the rule goes into effect, all buyers will see two new documents: loan estimate and closing disclosure documents.
Replacing the good-faith estimate and the early truth-in-lending statement will be the loan estimate form, which summarizes the terms of a mortgage and estimates loan fees and closing costs. The new form combines the good faith estimate with the early truth-in-lending statement into one shorter document.
Replacing the final truth-in-lending statement and the HUD-1 settlement will be the closing disclosure form, which provides a detailed account of the entire real estate transaction, including loan terms, fees and closing costs. The new document combines the truth-in-lending statement and the HUD-1 settlement into a form that is shorter and more user-friendly. It’s easier for consumers to read.
“Fifteen years ago lenders and title companies weren’t held to their estimates of what a loan would cost, so occasionally you would hear horror stories of borrowers forced to pay an extra $5,000 at the closing table,” says Mark Dietz, senior vice president and area sales manager for EagleBank in Potomac, Md. “Earlier revisions to transaction documents made it clear which fees could change and which ones couldn’t. These new revisions are taking clarity one step further, which is a good step to make consumers feel more confident that they understand their loan terms.”
Experts say that the new documents are designed to make it easier for consumers to compare loan options as well as to understand if something changed between the time they applied for a loan and the settlement.
Faster estimates
In addition to the revision of the forms required for real estate transactions, the new rules require lenders to provide a loan estimate to borrowers within three business days after they apply for a mortgage and to provide a closing document three business days prior to the closing, says Todd Ewing, president of Federal Title & Escrow in Washington.
The closing documents now are supposed to be given to consumers 24 hours prior to settlement, but in practice, the documents are sometimes seen on the same day as the closing.
“While consumers may not be that aware of this, this changes the traditional interface between buyers, sellers, lenders and title companies,” Ewing says. “Traditionally, title companies prepared and delivered closing documents to borrowers, but now that lenders are being held responsible for meeting the deadline, lenders are typically taking on the preparation themselves.”
Kider expects that lenders and title companies will work in coordination with each other even though the lender is ultimately held responsible for meeting the standards of the regulation.
Ewing says he thinks the three-day rule is a good one because it gives borrowers an opportunity to review the documents and avoid surprises at the closing table.
“The three-day rule prior to the closing is the piece of these new regulations that will have the biggest impact on consumers,” says Josh Greene, president of Eastern Title & Settlement in Rockville. “They will have time to really read the loan terms and the closing documents. If they don’t understand something, they have time to call their Realtor, their lender or their title company and ask them for an explanation.”
The three-day rule for the loan estimate redefines what goes into a loan application, Dietz says.
“A loan application requires the borrowers’ names, the borrowers’ income, the borrowers’ Social Security number, the property address, the estimated value of the property and the loan amount,” Dietz says. “Once the lender has that information, the clock starts ticking on the three business days to generate a loan estimate. Then the borrowers have to sign an intent to proceed form to start the normal underwriting process.”
Lenders cannot charge any fees except for a credit report and cannot require verification of any information from the borrowers before a loan estimate is generated and the Intent to Proceed form is signed, Kider says.
Today, borrowers often provide documentation and sometimes pay for an appraisal before the good faith estimate is generated.
In a competitive housing market, though, buyers who have identified the home they want to buy will be more likely to sign the intent to proceed form immediately so that they can solidify the contract.
While an official loan estimate is only generated after a loan application for a specific property is made, Dietz says lenders can generate a “fees worksheet” or similar document to help borrowers prepare for their cash needs at the closing during a preapproval process.
Corr says consumers should see the new regulations as a great opportunity for them to have time to read the information about their loan.
“Review the documents immediately and compare them to the loan estimate to make sure they match,” Corr says. “The sooner you catch an error the better so you can avoid a significant delay in your settlement.”
“This is the most significant transaction most people make in their lives both emotionally and financially, so it’s important that consumers educate themselves on the process,” Dietz says. “They should go to the CFPB site to learn what they can and then not be afraid to have a sincere dialogus with their lender to get any questions answered.”
Closing forms: what’s changing
• The three-day rule is the biggest change to mortgage closings — borrowers need to receive their loan estimate three days after an application is signed. And most important, they must receive their closing documents three days before settlement. If significant changes are made to the closing document, the lender will need to revise the closing document and the closing will have to be delayed by three days.
• The good faith estimate, truth-in-lending and HUD-1 settlement forms will disappear. Replacing the good-faith estimate and the early truth-in-lending statement will be the loan estimate form, which summarizes the terms of a mortgage and estimates loan fees and closing costs. The new form combines the good faith estimate with the early truth-in-lending statement into one shorter document.
• The loan terms are clearly stated and the estimated closing costs — and an explanation of what they are — are also more user-friendly.
• Replacing the final truth-in-lending statement and the HUD-1 settlement will be the closing disclosure form, which provides a detailed account of the entire real estate transaction, including loan terms, fees and closing costs. The new document combines the truth-in-lending statement and the HUD-1 settlement into a form that is shorter and more user-friendly. .
